Middle East ETFs Head-To-Head: GULF vs. MES

by on April 21, 2010 | ETFs Mentioned:

After the Dubai debt crisis late last year, many investors feared that the Gulf boom was quickly coming to an end. But obituaries written for the Gulf economy turned out to be premature, as Gulf States such as the UAE, Qatar, and Bahrain have bounced back from that scare to post solid returns in 2010. Although Dubai continues to struggle as it flushes out the excesses of its property boom, neighbor Abu Dhabi is expected to grow its GDP by 3.8% this year, while Qatar is expected to have a world best 19.2% GDP growth in 2010. These forecasts have been boosted by increased oil prices, which have more than doubled from their lows last April. The soaring price of oil has helped to fuel the economies of the Gulf region while Qatar looks to benefit from expanded production of its vast natural gas reserves which could stimulate the region for years to come. But the improved economic outlook is also attributable to strength in domestic demand and non-energy sectors of the economy.Currently, there are two primary ETF options available to investors seeking exposure to this area of the world: the Market Vectors Gulf States Index ETF (MES) and the WisdomTree Middle East Dividend ETF (GULF). Below we highlight the main differences between these two ETFs, including comparisons of country exposure, expenses, and risk profile. While MES and GULF are similar in many ways, there are some nuances that may make one more appropriate for certain investors than the other (see more head-to-head ETF comparisons here).

Indexes

GULF tracks the WisdomTree Middle East Dividend Index, a fundamentally-weighted index that measures the performance of companies in the Middle East region that pay regular cash dividends on shares of common stock and that meet specified requirements. Companies eligible for inclusion in the Index must be incorporated in and have their shares listed on a major stock exchange in Bahrain, Egypt, Jordan, Kuwait, Morocco, Oman, Qatar or the United Arab Emirates.

MES follows the Dow Jones GCC Titans 40 Index, which provides exposure to publicly-traded companies that are headquartered in countries belonging to the Gulf Cooperation Council (GCC) or that generate the majority of their revenues in these countries. The GCC consists of the following six countries; Kuwait, Bahrain, Saudi Arabia, Qatar, United Arab Emirates, and Oman.

Country Allocation

Country MES GULF
Qatar 21.5% 32.8%
UAE 27.4% 17.1%
Kuwait 40.5% 15.6%
Egypt 0.0% 17.9%
Morocco 0.0% 9.4%
Oman 4.8% 4.1%
Other 5.8% 3.1%
As of 12/31/09

Usually, ETFs that are tracking companies based in the same area of the world have very similar breakdowns by individual country (such as BRIC ETFs). But this is not the case for MES and GULF. As presented in the adjacent table, these ETFs split exposure across countries in very different ways; MES gives the largest weighting to Kuwait, while GULF gives the largest allocation to Qatar. Furthermore, the ticker “GULF” only describes a portion of the ETF’s holdings; this fund allocates a decent amount of its assets to countries outside of the Gulf, such as Egypt and Morocco (9.4%). For investors especially bullish on Egypt, see this article on Van Eck’s new Egypt ETF (EGPT).

Holdings

Investors looking at a Gulf States ETF might expect a heavy tilt towards the energy sector. But GULF has a surprisingly low allocation to this sector, which comprises just 1.2% of the total assets. Instead, GULF is heavily weighted towards financials and telecommunication firms, which make up about 60% of holdings. GULF has minimal exposure to consumer product firms. MES also has minimal exposure to energy and consumer firms and substantial exposure to financials and telecoms; these two sectors account for more than 70% of total assets.

Performance and Fees

Both ETFs have performed very well in 2010, with each posting a double-digit gain since January 1st. Thus far in the year, GULF has edged out its counterpart by posting a gain of 14% compared to 10.6% for MES (see historical performances of MES and GULF). The trend reverses if taken back over the past 52 weeks, during which period MES has slightly outgained GULF.

Due to the challenges posed by investing in some of the hard-to-access regions represented by these ETFs, both MES and GULF are among the most expensive ETFs currently on the market; GULF charges 0.88% while MES charges 1.0% (see a list of the Cheapest ETFs).

Verdict

Despite following a similar area of the world, these funds could not be more different in terms of their country exposure. However, they both have similar expense ratios and large concentrations in the financial and telecom industries. For investors seeking lower costs and more diversified Middle East exposure, GULF offers a compelling choice. However, for investors seeking concentrated exposure in the Gulf economies, MES could be the better choice.

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Disclosure: No positions at time of writing.